For over half a century I have worked as an investment banker, and then written about Wall Street, highlighting the market upheavals of 1973-4, 1987, 1999-2000, and 2007-2008 and their ramifications for the American economy,the disparity of wealth in the nation and the continuing risks of another deep global financial crisis.

Previously I was National Editor and Senior Editor at Forbes Magazine, New York Bureau Chief of The Boston Globe and Wall Street correspondent of The Economist.

Hank Paulson And The Wall Street/Washington Axis Of Power

The revelation that Treasury Secretary Hank Paulson, in July, 2008, just before the apex of the market meltdown, told a group of hedge fund managers– many of them former Goldman Sachs stars– that Uncle Sam had a plan to take over Fannie Mae and Freddie Mac– wiping out their common stock and preferred shares– was a terrible betrayal of the public trust, if accurate. Paulson had no business meeting in private with a group of hedge fund managers and investment bankers to give them any material inside information about the intent of the government to put in conservatorship the broken bankrupt quasi-public entities that supported the private mortgage market. Should this accusation be proven, the holders of Fannie Mae stock have every right to sue Uncle Sam for favoring the rapacious insiders over the naive outsiders.

Now comes an even more damning disclosure that Paulson played a key role in facilitating the meltdown of Wall Street– years before he was called to duty by George Bush– and had to use many trillions of taxpayer funds to remedy what he had helped facilitate in the first place. The evidence, sent by email from a source called ” Aurelius” shows that in 2000 Paulson led the charge to ease a tight capital rules on Wall Street, so that the firms could leverage themselves up to the dangerous level of 30 to 40 times equity capital– rather than the much less risky 15 times that existed before 2004.

In Paulson’s SEC testimony of February, 2000–, the then Goldman Sachs chairman “ urged the SEC” to change the net capital rule “to allow for the more efficient use of capital.” The reason given; “This is the single most important factor in driving a significant part of our business offshore.” Paulson, apparently, wanted the rule liberalized so as to allow Goldman Sachs to use the same amount of leverage in its business as its European competitors.

This change in the capital rules, unknown to me and most of my media brethren, was one of the most shocking disclosures in the documentary film, “Inside Job,” which won the Oscar last year.

It underscores the ironic possibility that Paulson both led the charge to weaken the net capital rules on Wall Street in order to power-up the profit-making machines– and when this all turned sour, Paulson– as Treasury Secretary, had to join with Fed Chairman Ben Bernanke to bail most of the whole lot out of the terrible mess that had been created. If true, Paulson was first on the side of reckless gambling– and then became chief bailer out.

In any case, by 2004 the Consolidated Supervision of Broker-Dealer Holding Companies legislation was enacted. It allowed for a “voluntary alternative method of computing deductions to net capital for certainn broker-dealers. This alternative method permits a broker-dealer to calculate net capital requirements for market and derivatives related credit risk.”

This “voluntary method of computing deductions to net capital allowed Citigroup, Bank of America, Bear Stearns, Lehman Brothers, Morgan Stanley, Merrill Lynch and Goldman SAchs to carry a much larger inventory of securities on and off their balance sheets.

To be fair about it, though and this is key to the change made–, the language insisted that the “regulators would have to satisfy themselves that the firms have robust credit and risk management policies and practices.” So, the lack of judgement on the part of the firms was not countered by the regulators– the Fed, the Comptroller of the Currency, the SEC, the NYSE et al. being of sound mind and body to judge whether “:robust credit and risk management policies and practices” were in sufficient supply and effective shape. You know how it all ended.

The rule change, embodied in amendments to the Securities Exchange Act of 1934 established “a voluntary, alternative method of computing deductions to net capital for certain broker-dealers. This alternative method permits a broker-dealer to use mathematical models to calculate net capital requirements for market and derivatives-related risk.”

According to a source who does not wish to be identified, Hank “was the one pressing hardest” for this new freedom to expand the level of proprietary trading. As my source wrote me today; “Hayek was right. We’ve lived through an engineered crisis that has made those responsible for it ever more powerful.”

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